Fear Versus Long-Term Investing and a Brotherly Reunion


(Keeping you up-to-date since 2006)
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May 22, 2022
CHINA’S “COVID ZERO” POLICY SETTING ITS ECONOMY BACK: After brutally suppressing its people in February and March of 2020, China had returned almost to normalcy in the summer of 2020 (aside from not being able to leave or enter the country). China developed its own vaccine and made it widely available, but the vaccination rate, and the booster rates, have been disappointing. And, with the effective shut-down policy at the beginning of the outbreak, far fewer people have natural immunity than other countries. Finally, China does not have an effective plan to treat people during an outbreak. And so China has decided to eradicate the disease within its border by locking down hundreds of millions of people for weeks at a time. In April, the Shanghai province’s industrial production was down 62.6% from a year ago. Other areas have been severely impacted as well. So far, U.S. consumers have not yet felt any direct impact, but that could change in the coming months. Meanwhile, consumer spending in China is way down. The first four months of 2022 have been the weakest start for the homebuilding market since 2015. Lending activity by banks is at its lowest point since the global financial crisis. If China cannot quickly recover from its COVID-zero policies, its future growth prospects could dim severely as it suffers from the ongoing impact of decreased consumer spending, less housing wealth, and a big hit to its reputation as a reliable global supplier.
FEAR DRIVES U.S. STOCKS DOWN: Investors are worried about the health of the U.S. and global economies. The oncoming higher interest rates took a big toll on expensive stocks early in the year, especially growth stocks in the technology sector. This week, it was not tech companies, but retailers that sparked the fear. Target and Walmart reported profits being hurt by rising costs and supply-chain disruptions, and their stocks sank. Until investors get confident that the Fed can tighten monetary policy and reel in inflation without triggering a recession, markets will stay volatile. Most companies in the S&P 500 are reporting growth and profits beyond expectations, but it is the prospect of future shrinking profit margins that are influencing the selling.
LONGER-TERM PERFORMANCE: Below are the annualized three-year and five-year numbers for these same indices. Consider this hypothetical: You invested your money five years ago in these three areas of the market. You didn’t look at it once until today. You are going to look at these numbers and feel pretty good about your investment. Don’t bee too short-term focused. These down markets will come, and after they recover, a down market will occur again. Don’t get too excited when the market rises in the short term, and don’t get too rattled when the market falls.
SHOULD I BUY? SHOULD I SELL?: Wherever the S&P 500 goes, it is already dropped nearly 18%. So it is that much closer to the bottom of where it will go than it was at the beginning of the year. Will it go down further? How much? Is it oversold and time to buy? In general, these are not the first questions you should be asking. These questions are the questions of market timers. Like gamblers, you might be right when you market time and make a lot of money and gain bragging rights. If you want to invest in companies that you believe over the long-term (see three and five year numbers above) will provide you with solid, positive returns despite the current trend of the overall markets, then you should not be strongly influenced by short-term market trends. Think strategic, not tactical. Take a deep breath. This is what markets do. It’s always a bit different than the last time, which creates the fear, even apocalyptic fear. But until the apocalypse, markets are likely going to continue to rise and fall and trend, over the long-term, in a positive direction.
INFLATION AND RECESSION: The “R” word is being discussed as much as ever right now. Technically, that means two quarters of negative growth in a row. We just had one, but the current quarter is not likely to come in at negative growth. Leading economic indicators are not pointing toward recession. One key factor is the consumer. The consumer in the U.S. continues to spend and drive economic activity. Consumer spending has been up in six of the last eight months. Why the concern? Real disposable income has been down in 11 of the last 12 months. Income is not keeping pace with inflation. Consumers are still spending stimulus money that is sitting in their bank accounts. If inflation does not calm down, this will slow spending eventually.
MORE MONEY: The supply of actual money is referred to as M2, or money supply. Historically, M2 grows at a rate of around 6% to 7%. During much of 2021, M2 exceeded 10%. Since February, M2 has slowed significantly. Monetary policy works with a lag. Continued slowing of M2 should have a restraining effect on inflation. (Sources: St. Louis Federal Reserve, U.S. BLS)
EXISTING HOMES SALES DECLINE SLIGHTLY IN APRIL: Sales of existing homes slipped 2.4% from March. Compared to one year ago, sales are down 5.9%. These numbers are coming down from a very hot market. The inventory of existing homes increased to 1.03 million from 0.93 million in March. Current inventory is 10.8% less than a year ago. Meanwhile, the median existing-home price now sits at $391,200, up from $340,700 a year ago. The average 30-year mortgage in April was 4.98%, and that rate is now about 5.45%. People often rush to buy when rates are rising, but eventually rising rates slow buying activity as people get priced out of the market or just choose to sit on the sidelines.
NEW HOUSES ON THE WAY: Ready or not, there are a record number of new houses under construction in the U.S. right now. The combined number of single family and multi-unit dwellings under construction is 1.641 million. Meanwhile, housing starts, the measurement of the beginning part of the process to build a housing unit, slowed in April. The housing market, which needs a lot of lead time, is acting rationally. We do need more inventory to be sure, but with higher buying costs, demand is likely to decrease, causing builders to begin the process of getting more cautious.
(Sources: nar.realtor/newsroom/existing-home-sales-retract-2-4-in-april AND calculatedrisk.substack.com/p/april-housing-starts-all-time-record)
CONTINUING TO WATCH THE DATA: The number of people dying in the U.S. and in the world who are COVID positive continues to decrease. U.S. deaths dropped another 13%. World deaths moved down by 9%. (World data on bottom graph below).
(Source: worldometers.info/coronavirus)
HOSPITALIZATIONS: Hospitalizations and infections for COVID in the U.S. have been rising during the past several weeks after hitting bottoms. Deaths and trips to the ICU remain near or at record lows since the pandemic began. (Sources: covid.cdc.gov/covid-data-tracker AND worldometers.info/coronavirus/ AND coronavirus.jhu.edu/data/hospitalization-7-day-trend).
A COP, AN ENGINEER AND A FINANCIAL ADVISOR WALK INTO A FOREST…..: It sounds like the beginning of a bad joke. In reality, its just a description of this picture of my two brothers and me. Our homes range from Massachusetts to Florida, and so it is nice, and too rare, that we all get to hang together. We get along great (I know a lot of grown siblings can’t say that). I think it is my charming sense of humor that is the glue that keeps us together.
Have a great week!
Our mission is to help you see the objective, find the path, and navigate past the obstacles to a more prosperous future.
Douglas R. MacGray, J.D., C.F.P. ®
Stonecrop Wealth Advisors, LLC
Direct | Cell | Fax
(610) 628 4545
“During my lifetime I have dedicated myself to this struggle of the African people. I have fought against white domination, and I have fought against black domination. I have cherished the ideal of a democratic and free society in which all persons live together in harmony and with equal opportunities. It is an ideal which I hope to live for and to achieve. But if needs be, it is an ideal for which I am prepared to die.” Nelson Mandela

“Be kind and compassionate to one another.” Ephesians 4:32

CHINA’S “COVID ZERO” POLICY SETTING ITS ECONOMY BACK: theovershoot.co/p/covid-zero-is-crushing-china?s=r
EXISTING HOMES SALES DECLINE SLIGHTLY IN APRIL: calculatedrisk.substack.com/p/nar-existing-home-sales-decreased-7ff?s=r AND https://www.nar.realtor/newsroom/existing-home-sales-retract-2-4-in-april
INFLATION AND RECESSION: https://horsesmouth.com/talking-with-clients-about-the-tough-start-to-2022
(c) 2022 Stonecrop Wealth Advisors, LLC, All Rights Reserved
*S&P 500: This is a measure of the performance of the 500 largest companies in the United States, and it a common index to track the performance of U.S. equity markets, especially the large cap markets.
*MSCI All Country World Index X US: This is a broad measure of the performance of worldwide equity markets excluding the United States.
*Bloomberg Barclays U.S. Aggregate: This is a measure of the U.S. bond markets.
Investment advisory services offered through Stonecrop Wealth Advisors, LLC, a Registered Investment Advisor with the U.S. Securities and Exchange Commission.

    Doug MacGray

  • DATE

    May 22, 2022


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